Tuesday 26 March 2013

Boensch V Pascoe/ Conduct of trustee


Boensch v Pascoe - court inquiries, remuneration, independence ...

by IPA | Dec 18, 2007
Boensch v Pascoe [2007] FCA 1977 is a Federal Court decision that raises issues concerning:
  • court inquiries into insolvency practitioners’ conduct;
  • pursuing recoveries for remuneration; and
  • independence and conflicts of interest, arising out of tensions in the trustee-bankrupt relationship, and conflicts involving the retainer of lawyers.
The decision is relevant to standards of conduct of insolvency practitioners generally and to the IPA’s new Code Of Professional Practice, which comes inot effect on 31 December 2007.  Other issues including abandonment of the bankrupt’s proceedings (s 60 BA), communications with the bankrupt, meetings of creditors, objections to discharge and proxies are covered in the judgment.
The Court was asked by the bankrupt to pursue an inquiry under s 179 of theBankruptcy Act into the conduct of the trustee; the equivalent section in theCorporations Act is s 536: see Maxwell-Smith v Donnelly and Hall v Poolman.  The Court refused the application.
The judgment should be read in its entirety but these issues and comments are extracted for the benefit of IPA members.
Standards of trustee conduct
The Court referred to the standards of trustee conduct prescribed by Schedule 4A of the Bankruptcy Regulations.  Amongst other things the Regulations impose a duty to act honestly and impartially (Sched 4A cl 2.2) and to disclose and avoid actual and potential conflicts of interest (Sched 4A cl 2.3).  The Court saw these standards as
“consistent ... with the standards of prudent administration upon which the Court would normally insist”. 
See now Chapters 5 and 6 of the IPA Code.
Recovery of assets for payment of remuneration
The Court said that a trustee can legitimately pursue assets for the benefit of the trustee’s remuneration, saying that  
“[the bankrupt] relied heavily upon the fact that recovery of additional property would also provide the only source of funds from which the trustee’s fees might be paid.  As Mr Pascoe said in his evidence, that is not an exceptional circumstance.  It may readily be the case that the very circumstance of bankruptcy presents a trustee with a circumstance in which insufficient funds are, or will ultimately be, available to pay creditors in full and where the trustee’s remuneration also may depend upon recovery of funds into the estate.  A trustee does not thereby become disabled from an efficient and, if necessary robust, administration of an estate because his own fees may depend on the outcome.
Recovery of a trustee’s fees is guaranteed by the Act if funds are available in the estate.  Payment of ‘the costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the trustee’ is given a substantial priority (s 109(1)(a)).  It is the Act itself which orders the priorities of payments out of the estate.  The fact that the trustee’s fees would be met before creditors were paid did not disqualify Mr Pascoe from making the necessary decisions or taint them with self-interest. 
In my view there is no substance [to the challenge] that Mr Pascoe was motivated by pecuniary self-interest at the expense of a proper and even-handed evaluation of creditor’s interests.  If the fact that Mr Pascoe’s remuneration might come eventually from the recovery of property against the wishes of some claimed creditors was a disqualifying factor then it would disable him completely from the administration of the estate as soon as opposition arose.  It would disqualify every trustee in a similar position.  The difficulty could not be cured by treating creditors more ‘even handedly’.
This issue has recently been raised in the Hall v Poolman decision, and other decisions referred to on the IPA website. 
Legal advice
The Federal Court raised issues about the solicitor for the trustee also acting as solicitor for a creditor at a meeting of creditors and the trustee being
“seen to take advice from the representative of a creditor who was clearly in conflict with other persons at the meeting about the question whether Mr Pascoe should continue as trustee ...”.
Conflict based on a break down in relations
There was no basis for removal of the trustee because of the poor relationship between the trustee and the bankrupt, which the Judge described as “not a smooth one”.
“Obviously enough, a bankrupt should not be allowed, by an assiduous pattern of resistance to the trustee of his estate, to generate and then rely upon a suggested reason for removal thereby created.  No doubt there are many instances in which disagreement may arise about the way a trustee is administering an estate or exercising his powers. ... It is clearly an insufficient ground for removal of a trustee that a bankrupt resists the proper administration of his estate or sets out to frustrate a trustee in the proper performance of his duties”.
In this case, “the apparently marked lack of trust” between the trustee and the bankrupt did not indicate any failing by the trustee in the administration of the estate.  See the IPA Code at Chapter 6.12.4.
Objections to discharge
The court upheld objections to discharge that were lodged by the trustee.  Issues concerning the use of objections to punish the bankrupt, or to achieve some collateral purpose, were raised in the judgment.  See also Lockwood v Vince [2007] FCA 1946 for a recent decision on this law. 
Michael Murray
Legal Director, Insolvency Practitioners Association
E-mail: mmurray@ipaa.com.au 
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